Tuesday, August 30, 2011

What to do with shares in HP?

As previously documented here at the blog, CCI had taken a position in Hewlett Packard (HPQ).
The good news the position was entered via options so the purchase price was at a slight discount. The bad news the stock  plunged badly on the news of their potential sale of the PC unit, acquisition of Autonomy and reduced earnings expectations.

Now that the dust is settling, it is time to figure out what to do with these shares. 

After some analysis, I documented my go forward strategy with HPQ in this article at seeking alpha.com.

We will track progress of this position here at the blog.

Monday, August 29, 2011

MMM - Skimming Some Gains

The last 3M post discussed trying to skimming a little profit by selling $80 puts just a few days before expiration.  That post also "warned" that this trade meant that an investor had to be willing to "risk" being put the stock if it fell quickly.   Well it did fall,  and CCI is the proud owner of one lot  of MMM at a price around $79.50.

With MMM bouncing back toward $82 today, CCI sold one lot of Sept $82.50 covered calls against these shares today for $1.65 after commissions
  • If the stock continues to rise, we will get called away at $82.50.  We will take our 5+% monthly profit and go home. ($3 in capital appreciation,  $1.65 in option premium).
  • If the stock pulls back this option premium will lower the Break Even Point to under $78, and we will sit and wait to see what comes next.

Trying to generate income by selling puts in Corning and BAC

With cash paying near zero, and fixed income yields low and facing the risks of rising interest rates eventually, it is a challenging time to generate income from a portfolio.  (or is that fixed, non-income...lol).  Dividend paying stocks are certainly one alternative to generating income.  However, along with this approach comes all the risks associated with equity investing.  A way to reduce the risk of holding equities while actually generating more income than can be received from dividends is to sell naked puts for stocks that seem to have hit some floor level.

CCI made two trades at the end of last week and documented the rational and benefits of this type of trade in this article at seeking alpha.com.  It describes how selling puts in Corning and Bank of America at strikes well below both their current price and their book value can yield 4-5% in 1-2 months.  These position also offer a significant buffer of safety if the stocks were to resume falling in price.

After making the trades last week, it took some time to write and publish the article.  Both stocks moved up aggressively over that period of time.  The good news: that puts these trades solidly in the money and already ripe for potential harvesting.  The bad news: CCI readers may no longer have the opportunity to take similar position unless their is a pull back in price or they are willing to accept substantially less reward (and risk).

I'll add these two trades to the downgrade portfolio thread because they were initiated somewhat in conjunction with the market levels after the S&P downgrade of the US.

Wednesday, August 24, 2011

Is That a Popping Sound I Hear?

Gold took about a 5 % hit today.

Due to exceptionally brilliant, insightful, analytical skills (or maybe just dumb luck), CCI took off the gold trade a few days  ago.  Mostly because of a concern that the big money could leave quickly.

Piling on to this thought, CCI felt the momentum was clearly down on gold today,  so decided to day trade the double short gold etf (GLL).  Started trading a little late in the day today, and hence purposely had very tight stop-loss limits on the trade.  That led to getting stopped out of the trade with only a very modest  .6% gain.... in an hour.  Wonder what that would be on an annualized basis?...lol.   A little more seriously, that is more than double the yield on a 2 year treasury.

While only a modest gain, we will still call this a victory.
That pushes the YTD record on double short hedging  to 10-0-4. 

Tuesday, August 23, 2011

ANR - What next?

CCI had success trading Alpha Natural Resources in the past, and about a month ago re-entered the trade via selling one lot of $41 Aug puts.   Unfortunately, since then ANR has gotten clobbered really, really hard.  Some of the reasons include; the general market decline, perceived global slowdown and hence less demand for coal, and most importantly a poor earnings report.  The stock declined to a recent low of $26 and one lot of shares was put to CCI at options expiration for a cost just under $40.  Ouch.

When things fall this much, obviously the original thesis was not right.  However,  instead of just panic selling (although that is always an urge just to get rid of the pain), I looked into some fundamentals. The first thing that popped out at me was Yahoo Finance showed ANR book value at $37.  In theory that means ANR is trading well under book value.   That seemed to be too good to be true, so I looked a little deeper at the balance sheet. A lot of the book value is associated with good will from the Masse acquisition and other intangibles.  However, by my math, just tangible assets represent a value of  $26/share.  This strikes me as a  good support level for the stock.  The market might agree with that because it appears to be where the stock bottomed in recent trading and the option volume around that strike is slightly elevated. 

Last night, ANR announced a stock repurchase program.   I'm not sure if that is really a long-term bullish sign, but at minimum it does seem like a good attempt to stop the slide of the stock. 

Given the above information, CCI sold a lot of $26 Sept puts this morning for $1.08.  That option premium will yield 4% if the stock stays above my adjusted book value over the next month.

By mid morning, the stock was up near $31 up 9% on the day.  (Did I ever mention how much I love those rational markets).  CCI figured this can't go on forever, so we sold a lot of Sept $34 covered calls against the shares owned for $1.01.  That is about a 3% option premium.

* * *

Entering a position at $40 in ANR certainly seems like a really bad decision..  In these situations the urge to panic sell or wildly double down exist.  Hopefully these options trades represent a good balance between those two extreme choices. CCI is hoping the stock settles in somewhere between $26 and $34 and we can collect both premiums as a way of recouping some of the losses on this bad call. 

Stay tuned.

Monday, August 22, 2011

Taking Profits in Gold

CCI decided today was the day to take profits in the gold options trade that was in play.

To refresh the reader's memory, CCI sold Sept $57 puts in the gold miners etf (GDX) and bought Sept $148 gold options (GLD) in mid April  for a small net credit.  Unwound both positions for a net gain of 29.1% on risk capital.  Obviously this worked very well as a hedge against the rest of the stock portfolio.  This small amount of leverage, and large move in the price means that this option play (essentially a risk reversal) actually outperformed a more simple purchase of GLD, which was up  27.9% during the same period.   (google doc of transaction data can be found here) More importantly, this option trade would have likely lost less if our timing was bad and gold had dropped over this period. 

It is never easy to fight the greedy desire to keep this trade running.  That seems particularly challenging with gold which really has no fundamental metrics (i.e. earnings, revenue, etc) upon which to determine a fair value, and hence decisions seem even more emotional. No one really knows where gold will go from here, but CCI decided now was the time to take profits for several reasons including:
  • Gold seems like its momentum is never ending.  Using the "law of round numbers"  (lol) $2000/oz could be in the cards.  That is well less than 10% up from here.   However, the move has been so parabolic it just seems like if the big money exits this trade it could loose a lot more than 10% very quickly.
  • These options expired in Sept. While that is still 4 weeks away, some action would have to be taken soon.  So why not now. To me that is one of the advantages of options...it forces an investor to make proactive decisions  vs. falling into passivity. 
  • Option volatility is high and hence now is an advantageous time to sell.
  • This rapid move in gold does not seem healthy, and hence some "entity" might want to slow the momentum down.  For example: Some government deciding to sell a lot of its gold, or more likely exchanges raising margin requirements. 
  • Alternative uses for this capital in the stock market is more compelling than it was a month ago.
So, we are out of this trade, but still hold some shares in the gold miners(etf) to represent gold in the overall portfolio.  If gold does pull back, we will likely reestablish a position in gold , possibly via options.

Sunday, August 21, 2011

Teva - Options Assigned - "5th time is a charm"

Aug $47.50 options sold a month ago, were assigned this option expiration cycle.
This is the 5th time puts were sold against the stock.
The other 4 times they expired for a gain.  So...the 5th time is a charm.
In total over the 5 transactions,  CCI pocketed $5.83 in option premiums.
So theoretically the break even point on this lot is $41.67.

Of course the stock is now down at $38.73.  Earnings estimates for this year are still at $5.  That estimate may get lowered, but even at $4 in earnings this still would have an attractive multiple.

As previously documented, we also have naked $37.50 Sept puts to add a potential third lot of the stock.
For now, we will just sit and wait awhile to see how this develops

Downgrade Portfolio Update

As discussed in previous posts, CCI established 7 trading positions in the past week around the S&P downgrade of the US.  The plan/hope is that it will prove profitable over the mid-term to have bought at such a fearful time (or at least that is the theory!).   The google document at the link below will track these 7 trades.
 Downgrade portfolio

A few highlights/lowlights from this week.
  • The naked put sale of the Japanese ETF expired worthless, thereby generating the small amount of income as planned. 
  • With Waste Management closing Friday's trading at $29.40, the naked put sale was assigned and we are the proud owner of a lot of  Waste Management shares at an effective cost of $29.30.  Not in a rush to get rid of this stock as it is now paying a 4.6% dividend, but if option volatility remains high we will likely look to write a covered call against this position to try to add to the income stream.
  • Most of the other positions are not too changed despite all the noise of the week except for the Bank of New York which is down.  Still believe that this somewhat unique bank stock is caught in the down draft of more traditional banks that have with a more risky position in the industry, but as of now this is a loser.
 Updates on these 7 positions will come out periodically. There are several other established trades that took a beating this week.  CCI will be sorting through the damage and determining next steps on these trades over the next several days.

Thursday, August 18, 2011

Risk Reversal on Materials ETF - xlb

Stocks plunged again today.  That provided the "opportunity" to establish the risk reversal options based position in the materials ETF (xlb) that was originally described in  Friday's Shopping List article

At the time of the trade XLB was trading at around $32.9.  Sold 2 lots of the  Dec. $31 puts and bought the $34 calls for zero out of pocket costs after commission.  CCI will be long the xlb if it falls below $31(5.8% more down)  or if the etf trades over $34 (up about 3.3%) on the December expiration.

Below $31 - We miss out on the first 5.8% loss but after that lose dollar for dollar on any further drop.  (i.e. this position looses less than buying the etf today).
Above $34 - We miss out on the first 3.3% of gain but after that gain dollar for dollar on any further rise (i.e. this position makes less than buying the etf today.)
The idea of sacrificing 3+ % of the gain to avoid nearly 6% of the loss seems like a good risk reward.  Also option implied volatility is high if it comes down there might be trading opportunities around this position

Wednesday, August 17, 2011

MMM - Time to trade this stock again

MMM is a dow jones index component and blue chip company.  It has been beaten down by the overall market drop, concerns about a slowing global economy and earnings announcement that "only" reaffirmed this years EPS estimate of $6.10 to $6:25.    CCI's opinion is that MMM's management likes to be conservative and under promise and over deliver, so I take this conservative guidance as business as usual for MMM.  CCI has successfully traded around this stock in the past as documented in this blog.

Given the stock has fallen from near $100 to $80, it seems like a good time to consider re-establishing a trading a position in this stock.   Given option volatility remains elevated, and we are comfortable owning the stock at this level, today I sold one lot of Aug $80 puts for $.55 after commission.  Two scenarios
  • If MMM stays over $80 this week, CCI will make .6 % in three days and reconsider entering a trade in the stock.  A very modest gain, but these days that small amount of income seems like a lot. If you believe standard option math theory this scenario is 2:1 more likely to happen than the next scenario. However,  an investor should not enter this trade if they are not comfortably owning this stock.
  • MMM falls below $80 this week.  CCI will own one lot at about $79.45 and look to trade around that position.  Likely by selling both a put to potentially acquire a second lot at a lower price and also sell a covered call against this lot.  These two option sales would generate a decent amount of income supported by the blue-chip nature of the company, 

Tuesday, August 16, 2011

Shorting speeches by politicans

With expectations running high for a meeting of the French and German presidents, CCI took the view that political speeches are most likely to disappoint.  Hence at the close of trading Monday bought the double short Europe etf (EPV)as a short-term hedge against Monday's market gains.   Last night it seemed both camps were already managing down expecations for the meeting. Then German GDP did not meet expectations, and European markets fell.

Sold it first thing Tuesday morning for a 3.5% gain. 

9-0-4 playing the double shorts this year.

Sunday, August 14, 2011

Cisco - $17 ...no $16...no $15...no $16...no $15...no $14..no $15..no $16

Cisco reported good earnings late last week.  Surprisingly to me it shot up from $14 to $16 like a rocket.

Looks like that $15 covered call with high volatility was not the right play as there would have been lots of better exits than that call.   CCI let one lot of stock get called away via this call.  This lot lost nearly 4%.  The market was down about 8% during the same period, and good thing we sold the $15 calls vs just selling last week or it would have been much worse. (how's that for a nice rationalization?...lol).  

CCI bought back the other lot of last Friday's calls late Friday. Hence I'm  still long one lot of $17 Jan calls.   Will be looking for a little better price to sell this lot and exit that trade as it still seems the the market pullback means there are better places to deploy this capital.

Saturday, August 13, 2011

Friday's shopping trip

Friday's market did not have near the volatility of the earlier in the week and was positive on the day.   That was not exactly the conditions I had in mind when I created the shopping list document in the following article.

fridays shopping list

However, some specific conditions still presented themselves to enter two of the  three potential Etf plays. described in more detail in the article.  Here are the trades made on Friday
  • Materials ETF XLB - risk reversal .  XLB never really pulled back on Friday and conditions never seemed right to enter. So nothing was done, but we will continue to monitor for possible entry next week.
  • Japanese ETF EXJ - put selling.  Somehow got an order processed to sell the Aug $9 puts for $.08.  The etf closed around $9.80. So if the Japanese stocks fall 8+% next week.  I own it.  If it does not fall 8% we make about .9% in a little more than a week.  (or about the income from a 5 year treasury for a year).  By the end of the day, the option was barely trading, so this opportunity is no longer available.  
  • Utility ETF XLU - coverd calls.  The xlu did pull back a little and this trade was entered.  Stock was purchased at $31.73 and Jan $32 calls sold for $1.24. (about 4%). That is a net cost of $30.49.  If this etf trades flat for the rest of the year we can make the 4% option premium, plus about 2% in dividends.  The portfolio does not start loosing money on this trade until under $30.
We will track these trades and hte ones from S&P downgrade Monday as a group

Friday, August 12, 2011

Ho Hum

Per yesterday's post, CCI felt that money might come off the table and drive the market down this afternoon. I put my money where my mouth was and day traded the double short financials (skf) this afternoon.

Skimmed off a 1% gain in a short period of time as the market (particularly financial stocks) sold off from the days high. CCI is now 8-0-4 this year when deploying this hedging strategy. 

In a really weird, convoluted way, I'm now almost hoping for a loss in this strategy soon because that would mean the market is moving up.  It really is not this "easy".

Thursday, August 11, 2011

Down, Up, Down, Up - A Shopping List of ETFS and their options for Friday?

Let's see
Monday down, Tuesday up, Wednesday down, Thursday up....hmmm...what's next?

Let me use my binary, asset allocation, forecasting tool to try to predict tomorrow's direction...heads its up, tails its down.

Wait! Better yet I'll use my proprietary,  oscillation, simulation, modeling tool to perform an in-depth pattern analysis ....hang on....calculating.....oh no....it seems to indicate ..... down again.

OK...enough with the attempt at sarcasm/humor.

But...........while no one can be sure what Friday will bring, there is obviously some real probability of a down or weak day on Friday.  Especially since there seems like some chance that fast money may take their money off the table and head to the Hamptons for the weekend (or may this week it is more like the fast European money coming off the table so they can go to the Riviera).  In any event, it seem prudent for an individual investor to have a game plan in the event of Friday market weakness.   Do nothing, move to the sidelines, accumulate?

In the event of a weak day CCI will likely try to accumulate some positions and has created a list of a few potential, conservative, trades using etfs and their options.  A more in depth article describing the rationale for these trades should be posted at Seeking Alpha Articles by CCI in the morning, but in summary they are
  • January at-the money covered calls on the Utility Sector etf (xlu)
  • December $32/$35 risk reversal in the Materials Sector etf (xlb)
  • Aug or Sept $9 naked put selling in the Japanese ETF (ewj) to try to generate some income.

Hopefully the market will rally again on Friday. In that event this list can be put on hold, and an early happy hour can begin.  If the market weakens into the weekend, CCI will try to enter these positions and track them as part of the downgrade portfolio started earlier this week.

Wednesday, August 10, 2011

Downward Momentum - If you can not beat'em then join'em

Another terrible day in the markets.  

Rumors about the state of French banks seemed to be in the "news" today.  I have no  insight into the French banking system.  They probably have some issues.  However, my inner conspiracy theory radar sure had the feeling that someone was positioned short on French banks, and knew it would not take too much noise to make the the already nervous world to get even more nervous about these banks.  

Who knows the real story but ....if you can't beat' em ...join' em.

CCI thought about trying to short some specific European banks, but took the easy approach and day traded the double short Europe ETF (EPV) today.  Skimmed off a modest  2+% profit    Once again a small hedge to the overall portfolio, but these days any gain feels good.  

7-0-4 with this hedging strategy YTD.  

Tuesday, August 9, 2011

Downgrade Portfolio

After S&P announced its US downgrade Friday it seemed highly probably that the markets would be volatile early this week.  I guess down 6.6 % on Monday up 4.7% on Tues can be described as "volatile" (rational would not be a word I would use).  During the relative calm of Sunday night CCI took the time to identify a few positions that might be worthwhile to trade in the upcoming volatility.  The rationale for four potential trades were documented at an article posted here at "options for downgrade monday" at seeking alpha.

Positions in these four relatively diverse selections were established in the last two days and are will be followed here on this blog under the tag of downgrade portfolio.

Ford (F) - Bought a lot of stock at $10.18 on Monday. As the stock rebounded this morning and volatility stayed high sold the $11 Oct calls against the position for $.68.   The stock closed Tuesday at $10.96.  Being fortunate enough to buy at $10.18 means there was already lots of opportunity to make money,  However, as it sits now, CCI is long the position at a break even point of about $9.50 (down 13+% from here) and the stock has a reasonable chance of being called away at an effective price of $11.68 (gain of 14+%).  CCI will look for good risk/reward points to exit the trade if/when option volatility falls.

Bank of New York (BK) - Bought at $22.77.  Closed Tuesday still down at $21.11.  Will be looking to write a covered call against the position if it moves up.

Waste Management (WM) - Sold Aug $30 puts for $.70.  Closed Tuesday at $29.40.   Would not be upset if this stock is put to us at a break even point of $29.30.  Would collect the 4.5% dividend and wait for awhile.

Health Care ETF (XLV) - Sold Jan 12 $29 puts for $1.73 based on the high volatility on Monday. Worse case we are long blue chip heath companies at about $27.27.  That is about 13% less than Tuesday's close of $31.28. The specific options were down to $1.24.  If/when volatility comes down,  we will be looking for an opportunity to add more legs to the trade possibly by using the proceeds of this put sale to buy an upside call.


Cisco - $17 ...no $16...no $15...no $16...no $15...no $14

CCI has decided it is time to exit its trade in Cicso. Several reasons
  1. The main reason for entering this trade was because Cisco represented a cheap, value play with a strong balance sheet and low valuation. That is still true today, but after the last few weeks there are now likely many, many stocks in value territory. It seems like it would be possible to find a value play that also has better growth prospects than Cisco.
  2. At the time of entering the trade there appeared to be several potential catalysts to turn around the fortunes of the company. This included the selling of some division, cost cutting via layoff and reorg, etc. Several of these things have happened, and even before the overall market collapse, they had not moved the needle on the stock. It is not clear what catalyst might move the stock in the near term.
  3. The initial investment thesis here also felt that more of Cisco's issues were process oriented than product oriented. However, recent results seem to indicate falling margins on some mainline product lines which could imply other competitive products are providing better value to the customer.

Given the above, CCI plans to exit the trade and believes there will be better places to invest the capital.

However........I did not want to sell into the teeth of a sell off and the volatility remains incredibly high so today I sold $15 Aug 12 calls for $.15 net of commission with the implied volatility at over 100%. Those are the weekly calls that expire in three days. (As an aside, the fact that weekly options even exist is kind of amazing...but I digress). Two outcomes if held until expiration this weekend.
  1. The stock rallies over $15 in three days (7%) - This really seems unlikely, but in this crazy market anything can happen. In this case, the stock is called away at around $15.15 and I'm OK with that for all the reasons mentioned above.
  2. The stock falls or stalls – The 1% premium over three days is kept as an offset for the loss and we look for another way to exit the trade next week.

Monday, August 8, 2011

CRM - Covered Short Position

As the "rational" market plunged today, CCI covered the short position in CRM at $130.

This specific transaction gained about 11% and the gain on overall short trades around CRM is now 17.7%.
A small spot of green in a sea of red.  CRM has basically just dropped with the market and not broken down more on company specific issues which was the primary motivation for taking the position.  However, in a decline like the past week it seems prudent to take advantage of whatever hedges were in place.

 CRM earnings are 8/18.  If (a big if) the stock rallies before then, we may re-invest these gains in a short option play around the earnings date.

Teva - Time for more

Teva stock is down about 24% from its previous peak.  Ouch.
It started going down based on its earnings report and subsequent poor clinical trials on Liquinamod MS Drug.  This is likely to lower future earnings estimates at some point in time, but the stock still has single digit p/es.  The stock further snowballed after earnings in conjunction with recent market declines.  It is a little hard to articulate why a European financial problem or US debt downgrade should adversely impact an Israeli drug manufacturer. One theory might be that Teva has had a lot of hedge fund ownership, and some of those funds might be in a situation where they are forced to sell something. Teva's bad results have made it a likely candidate for liquidation, and hence possible there is some forced selling going on making it a good time to step into the battle..

CCI is long one lot at $48 and will almost certainly be long a second lot at a cost (after options adjustments) of $41.67.   Stepped into the downdraft today to sell Sept $37.50 puts for $1.37.  If the stock stabilizes we will make about 3.6% in 6 weeks or if the drop continues we will be long a third lot around  $36.13.

Performance for this holding is tracked with a google doc here

Friday, August 5, 2011

Minmially, Minimizing the Downside.

Not a great week for equities.   It will take a little research time to search through this weeks carnage to see where buying opportunities might exist, but I suspect there are some out there.

CCI did successfully execute a leveraged, hedge trade today .  (i.e. day traded the double short financials ETF, (SKF)).   Skimmed a modest 1.2% profit out of the SKFs 3.3% gain for the day.  Of course its range for the full day was a kind of  an amazing  10% ($72.51 to $80.23).  

The gain on this trade only puts a very small dent in the drops of the week, but every little bit to minimize downside helps.  This pushes CCI  record on trading double short  ETFs to 6-0-4. 

Tuesday, August 2, 2011

Boeing - Buying when others are fearful

An Ugly day in the market today.

CCI bought a third lot of a position in Boeing today at just under $70.  Unfortunately it continued to fall all day down near $68, so not great timing.   However,  CCI thinks the overall story first documented in this this article in January remains correct.   The core of the investing thesis is that the dreamliner is a "unique" product in the world.  When it starts rolling off the line it will drive Boeing's stock back towards $100 in the future (2013?), but now was the time to start slowly accumulating a position in the stock

Two quarters after the article, Boeing's plan still seems to be to deliver about 25 dreamliners this year, but they certainly have had issues in the past.   This is not to say the last 6 months have been overly positive for Boeing as they had some govt contract penalties, had to split the order for planes from American with Airbus, etc.  However, they continue to plan to deliver the most planes in their history this year, ramping production into next year, and have a backlog of $323b (up only 1% this year).

So with today's fear in the market, CCI stuck to the plan of adding a lot under $70.  Hopefully it will pay off over the longer term.

Swing and a miss

Played the double short S&P Etf (SDS) again on Monday, because I felt the "debt ceiling rally" would not hold.    

The good news: Good Call.
The bad news : Got busy with real life and had to put on the trade entirely electronically (via  conditionals, and trailing stops).  Unfortunately, my attempt at automation of the concept and the actual volatility of the day cause the trade to be executed for only a gain of .2% . 

.2% up on a down day is "better than a sharp stick in the eye" but CCI had a hittable pitch lined-up and basically swung and missed.   Disappointing results. 

While technically this trade generated a gain it was so small we will classify it all yet another tie.
Now 5-0-4 trying to hedge via double shorts this year.